Fed Chairman Ben Bernanke may have kicked off “QE3” last week by sanctioning currency swap arrangements to relieve the dollar shortage in Europe.

The Fed is expected to launch “operation twist” – involving swapping short- for long-term securities to increase the duration of its portfolio – at this week’s open market committee meeting. This, however, will not expand the Fed’s balance sheet or the monetary base, so arguably does not qualify as “quantitative easing”.

It is possible that the Fed Chairman and his fellow doves would prefer full-scale QE – i.e. further securities purchases financed by creating bank reserves – but feel constrained by likely opposition from the three regional Fed presidents who dissented from the decision to extend the low rates commitment at last month’s meeting. More QE would also raise the ire of congressional Republicans, many of whom share Texas Governor Rick Perry’s view that such action would be “almost treacherous, or treasonous”.

Professor Bernanke, however, may have outflanked his opponents by agreeing to extend dollar loans to foreign central banks for onlending to local financial institutions experiencing funding difficulties. Barring offsetting Fed actions, such loans will expand US bank reserves and hence the monetary base. Coupled with “operation twist”, the net effect would then be identical to QE3 – increases in the monetary base, the Fed’s overall balance sheet and its aggregate duration exposure.

A minor disadvantage relative to explicit QE3 is that the Fed has no control over the size of the initial boost to the monetary base, which will depend on banks’ demand for dollars at the central bank auctions. The impact, however, is potentially large: dollar swap operations in late 2008 expanded to a peak of $583 billion, driving a similar increase in bank reserves – see chart.

Another difference compared with explicit QE3 is that the monetary base boost would unwind if dollar funding markets normalised, allowing banks to repay central bank loans. Such automaticity, however, might have appeal – normalisation, presumably, would occur in the context of an improvement in economic and financial prospects, implying less need for monetary policy stimulus.